The yoga-inspired-apparel retailer
LULU, -0.17%
whose sales have often outperformed the industry average, ushering its stock to a peak of $80.30 last May from a 2007 offering price of $14 a share, fell 5.1% to $62.57 on Tuesday after the company recalled its popular line of tight-fitting black Luon pants, citing “sheerness” problems.

It also said it expects a shortage of supply for the pants, adding that the affected items represented approximately 17% of all women’s bottoms in its stores. Worse yet, the company said the issue will have a significant impact on its financial results, leading it to forecast same-store sales would rise 5% to 8% in the first quarter, though they’d been up 11% through March 17, before the disclosure. It also lowered its first-quarter sales guidance to as much as $343 million from prior guidance of $355 million.

Lululemon Pulls Yoga Pants for 'Sheerness'

(3:45)

Lululemon said it was pulling its popular black yoga pants from stores after some of them were found to be overly sheer. Shares tumbled. Andria Cheng reports. Photo: Reuters.

From its weekly call with store managers on March 11, the company said it began to understand the extent of the problem. It blamed a supplier for the shipment of Luon, a nylon and Lycra blend, that became available in stores March 1. It began a recall of the product this past weekend. It provided no further details, citing a quiet period ahead of its fourth-quarter earnings release Thursday.

The latest quality-control snafu followed other problems Lululemon has experienced, including last year’s color-bleeding issue affecting some tops and sheerness problems in other products. Still, the latest recall was the biggest quality issue the company has encountered, analysts said.

It also has experienced other supply chain related issues. For example, it also had been hit over insufficient inventories, pushing it to make costlier transportation decisions.

“If all of a sudden your favorite pant isn’t there, you are giving the customer a reason to go somewhere else,” said Sterne Agee analyst Sam Poser, who cut his rating on the stock to neutral from buy, in an interview. “We suggest a wait-and-see mode until the Luon pant problem is resolved. There does not appear to be anything wrong with the core values of [the retailer]. However, there does appear to be a major quality-control problem in Asia.”

Poser said he’s also disappointed that the company didn’t host a conference call to specify the issues and “clear the air.”

In its annual filing, the Vancouver-based company said its reliance on third-party suppliers is a business risk — as are challenges from the likes of Nike Inc.
NKE, +0.31%
and Adidas
ADS, -0.15%
and, increasingly, the Gap
GPS, +1.25%
— as it doesn’t make any products itself. About two-thirds of its products are made by its top five suppliers, with which it didn’t have long-term contracts. The Luon fabric, for instance, was made by a single supplier in Taiwan, the company said in the filing.

The supplier, Eclat Textile Co., hit back Tuesday at Lululemon and said its clothes weren’t “problematic” and had cleared Lululemon’s certification process, according to a Wall Street Journal report.

Losing its luster?

“Lululemon is a great company — however, we feel there are some major issues that need to be resolved,” said analyst Jennifer Black of the firm bearing her name. “What we were all drawn to was the incredibly unique way Lululemon could transform fashion, form and fitness from the gym to street. We do not feel comfortable owning the stock at this point in time.”

She said the shortage of Luon pants could hurt the company’s sales of tops, too, as retailers typically sell 2.5 tops for every pair of pants. As a customer herself, she said she’s disappointed with the company’s new styles.

“We are beginning to wonder if there have been changes made to the creative team,” she said. “It seems that ‘Lulu’ has lost its luster.”

Some analysts suggested the company may be having some growing pains.

“It will remain a controversial name,” said Buckingham Research analyst John Zolidis, who in January lowered his rating on the stock to underperform. “The company has over leveraged its infrastructure, is over-earning, and the company’s well-above-industry-average operating margins reflect this. Either Lulu will need slow growth to catch up on infrastructure spending or execution-related risk will remain elevated possibly resulting in even more problems down the road. We don’t believe Lulu can course correct while maintaining the current growth rate.”

However, Lululemon, which still has a small store base and growth potential outside of North America, in online and into other product categories, has retained a core group of supporters in the analyst community. Half of the 22 analysts covering the stock rate it a buy, while 36% rate it hold or the equivalent. For 14%, it’s a sell.

“Today’s price is likely to be a very good entry point, and we gain comfort from the fact that what [Lululemon] faces is not a demand problem,” said Cowen & Co. analyst Faye Landes, who rates the stock outperform. “The burden is on the company, both on Thursday and in the coming months, to prove that [it has] taken the proper steps [and] can indeed grow what is without a doubt a terrific brand and leverage the opportunity at hand.”

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